Texas Telecommunications: The Road Ahead By Bill Peacock Economic Freedom Policy Analyst

Transcription

1 Polcy Texas Publc Polcy Foundaton November 2005 Perspectve Texas Telecommuncatons: The Road Ahead By Bll Peacock Economc Freedom Polcy Analyst Introducton Texas recently became the natonal leader n telecommuncatons reform when the 79 th Texas Legslature passed Senate Bll 5. Ths legslaton restructured Texas telecommuncaton laws n order to foster ncreased competton throughout the ndustry, brngng substantal benefts to Texas consumers, busnesses, and the economy. The most sgnfcant aspect of SB 5 s ts provson for a statewde vdeo franchse. Texas s now the only state that allows new entrants to receve a state franchse n order to provde vdeo servce that competes wth exstng cable provders. Companes wll no longer wll be requred to endure the slow, expensve and ant-compettve process of recevng franchses from local governments. And once exstng local franchse agreements expre, current cable provders wll be able to swtch to the statewde franchse as well. As dscussed later n the paper, Texans have already benefted from ths provson through ncreased nvestment, more jobs, new technology and lower prces. The effects of ths reform wll be felt natonwde the tmng and extent of the mpact wll depend on whether Congress or other states follow Texas lead. Despte the many postve aspects of SB 5, sgnfcant challenges stll le ahead. Many of the provsons of SB 5 are left for future legslatures to fully mplement, whle others could be sgnfcantly mproved. The resoluton of these ssues over the next two years wll lkely determne the robustness of competton n the Texas telecommuncatons ndustry for years to come. Ths paper examnes competton n the telecommuncatons ndustry, looks at specfc aspects of the regulatory system n Texas, analyzes the provsons and mpact of SB 5, and looks at the road ahead for telecommuncatons n Texas. It concludes wth the followng recommendatons to assst polcymakers n the mplementaton of SB 5 and n ther preparaton for contnued debate on ths ssue n the 80 th Texas Legslature. Regulaton The relcs of monopoly regulaton such as prce caps and prce floors should be removed from the current system. Frm tmelnes should be set for deregulaton of all telecommuncatons markets. Prce caps are the maxmum prces that companes are allowed to charge whch are set by government regulaton. Prce floors are mnmum prces on goods or servces set by government regulaton that lmt prce competton n a partcular market. 900 Congress Ave., Sute 400 Austn, TX (512) Fax (512)

2 Subsdes Sgnfcant reductons n telecommuncatons subsdes should be the focus of relevant nterm and legslatvely-mandated studes. Reductons n subsdes should be pared wth prcng flexblty. Taxes The hgh telecommuncatons tax burden on Texas busnesses and consumers should be reduced. A Bref Hstory Of Telecommuncatons Competton For most of the last century, cheap and unversally avalable local resdental phone servce was the prmary telecommuncatons goal of polcymakers across the country. The resultng regulatory regme kept competton at bay n order to mantan an elaborate web of subsdes that supported artfcally low local servce prces. In the 1970s, when t became clear to everyone that consumers were demandng servces that the regulated system couldn t delver, the country began to move nto the new era of telecommuncatons deregulaton. Telecommuncatons Equpment Telecommuncatons equpment was the frst sector of the ndustry to see sgnfcant deregulaton. Though phone companes argued that a consumer who plugged n a phone system produced by a thrd party could compromse the ntegrty of the telephone system, federal regulators opened up the equpment market to competton. 1 The result was a sharp declne n equpment prces, wth prces for phone handsets, key telephones, and prvate branch exchanges declnng at a real rate of between sx and seven percent per year between 1972 and Long Dstance In the area of long-dstance servce, MCI had begun to compete aganst AT&T as early as But competton was slow n spreadng because of the government-authorzed local phone monopoles. The negotated breakup of AT&T n 1984 allowed competton to floursh whch agan brought about sgnfcant declnes n long-dstance prces. Interstate rates fell 68 percent from 1984 to 2003, whle ntrastate rates fell 56 percent. 3 The slower declne of ntrastate rates s due largely to state regulators who have kept ntrastate access charges artfcally hgh n order to mantan subsdes of local phone rates. Cellular Servce Wreless phone servce had only just begun at the tme of AT&T s breakup, largely due to regulatory delays n lcensng equpment. And even then, federal restrctons on use of the rado spectrum by cellular servce sgnfcantly lmted the number of compettors n local markets. From 1984 to 1995, when there were just two cellular provders per market, nflatonadjusted rates fell by an average of only three to four percent annually. However, n 1993 the government allowed up to sx compettors n each market, resultng n declnes n wreless rates averagng 17 percent annually from 1995 to A cellular phone call whch averaged 50 cents per mnute n 1984 has declned to 8 cents per mnute today. 5 The Internet The explosve growth of the Internet, whch has outpaced the growth rate of most other technology servces, can be largely attrbuted to the lack of regulaton. Begnnng n 1966, the Federal Communcatons Commsson decded that data processng, and later Internet servces, should be free from prce controls, entry regulatons, and other restrctons mposed on telephone servce. 6 In addton, Congress has sgnfcantly lmted the taxaton of Internet access and transactons. As a result, competton n both Internet access and servces has been ntense, and s reflected n the rapd growth n hgh-speed Internet access and the smultaneous declne n prces. Natonally, hgh-speed connectons have ncreased from 2.7 mllon n 1999 to 37.8 mllon n Texas has followed the natonal trend, and even outpaced t recently: hgh-speed connectons n Texas ncreased 35 percent over the last year to 2.6 mllon. 8 In a report ssued by the Texas Publc Polcy Foundaton earler ths year, Robert Crandall and Jerry Ellg calculate almost a 15 percent drop n broadband prces from 1997 to 2003, 9 and anecdotal evdence suggests even greater decreases recently broadband today s avalable for as lttle as $14.95 a month, far less than SBC s standard rate of $49.99 n

3 Local Phone Servce Local telephone servce has had a dffcult tme sheddng ts 100 year hstory of regulaton. State regulators stll control sgnfcant aspects of local servce, ncludng prcng. Thus regulatory controls combned wth subsdes are often used to mantan low prces for local phone servce. The success of ths polcy can be called nto queston, however, when the stable prces for basc servce are compared wth the declnes n prces of other technology servces. Cable and Vdeo Vdeo s perhaps the last telecommuncatons servce to be opened up to competton. For years, cable companes had vrtual monopoles through ther local franchse agreements. Though these agreements dd not prohbt addtonal provders from enterng a market, hgh franchse fees to ctes and requrements that servce be offered cty-wde made the economcs hghly questonable for addtonal entrants. However, technology s begnnng to change ths, and satellte provders are beng joned by facltes-based provders as true compettors to the cable ndustry. The bggest remanng hurdle to robust competton n vdeo servces are local franchses, whch requre new provders to negotate entry nto each cty wth the local cty government. Texas dealt effectvely wth ths ssue n SB 5 through the statewde vdeo franchse. However, t remans an ssue for the rest of the country. The Texas Experence Ten years ago, Texas became the natonal leader n telecommuncatons reform when the legslature allowed ncumbent phone companes to opt for an alternatve regulatory framework that capped basc network servce at current level, gave them mmunty from rate-of-return regulaton, and allowed rate flexblty for other servces. The changes preceded, and n some ways led the way for, Congress overhaul of telecommuncatons law n Unfortunately, the state s once leadng-edge regulatory system had fallen behnd the rapd advances n technology. Whle the system dd a good job of fosterng the transton away from legally sanctoned monopoles, t had gone as far as t could go. The prmary reason for ths s that the system reled heavly on cross-subsdes, prce regulaton, and taxes to acheve the state s polcy goal of provdng low-cost, unversal resdental basc phone servce. The followng s a bref look at the Texas telecommuncatons system pror to the passage of SB 5. Subsdes Telecom subsdes n Texas are essentally schemes to redstrbute ncome from one set of consumers to another. There are four basc types of subsdes under ths regulatory scheme: long-dstance to local, urban to rural, busness to resdental, and vertcal to basc. The man mechansms for achevng these subsdes are the Unversal Servce Fund, long-dstance access charges, prce caps, and Prvate Network Servce for publc nsttutons. It s dffcult to accurately estmate the full costs of these subsdes wthout access to companes propretary earnngs and cost nformaton. But based on the publcly avalable nformaton, Crandall and Ellg estmated that the mnmum cost of these subsdes s $711 mllon a year. 11 In addton, they estmated that these subsdes caused market dstortons,.e., ncreased costs or reduced usage, that cause harm to Texas consumers of at least $206 mllon per year. Prcng Regulaton Prce regulatons n Texas telecommuncatons come n three forms prce caps, prce floors, and tarffed rates. Companes that have chosen alternatve regulaton under Chapters 58 or 59 of the Publc Utlty Code are generally subject to prce caps or floors on many of ther servces. Prce caps are used by polcymakers attemptng to hold down the cost of basc phone servce. However, the benefts of prce caps to consumers are questonable. Whle real local rates n Texas have remaned essentally the same snce the passage of the 1996 Rate of return regulaton allows a company to set ts prces so that t wll earn a margn of proft agreed upon by the company and regulators. 3

4 Federal Telecommuncatons Acts, f the federal subscrber lne charge s added n, Texans generally pay more for ther local servce today than they dd ten years ago. 12 Ths s n contrast to the declnng prces of vrtually every other technology servce. Texas also has prce floors n law desgned to prohbt companes from engagng n so-called predatory prcng,.e., offerng certan telecommuncatons servces at prces below ther long-run ncremental costs. Whle alleged to protect consumer welfare, prce floors n fact do the opposte; they protect busnesses from competton and mantan artfcally hgh prces by alterng consumer buyng preferences and denyng them the ablty to choose one product over another on the bass of prce. 13 Telecom Taxes Taxes are the thrd major element of the telecommuncatons regulatory structure n Texas. Texans are hghly taxed on ther telecommuncatons servces, payng an average of percent n state and local telecom taxes thrd hghest n the naton, versus the natonal average of percent. 14 Ths ncludes sales taxes, rght-of-way fees, and charges for the Texas Unversal Servce and Texas Infrastructure funds. Addng federal taxes of almost four percent means that the average total tax bll s almost 30 percent. Though cable and telephone servce are mergng together n practce, from a regulatory standpont they are stll treated separately. Texas cable consumers pay a total tax rate of approxmately 14 percent. 15 These hgh levels of taxaton add to the reducton n consumer welfare by addng costs and makng the economc decsons of consumers and busnesses less effcent. It s worthwhle notng that a state whch seeks to preserve low cost telecommuncatons servces for ts ctzens has one of the hghest tax rates n the country. Senate Bll 5 By the begnnng of 2005, Texas polcymakers recognzed many of the challenges faced under the agng regulatory structure, and telecommuncatons promsed to be hgh on the prorty lst of legslatve acton. Whle that proved to be the case, poltcs, telecommuncatons ndustry n-fghtng, and school fnance caused the legslatve sesson to come to an end wthout the passage of telecommuncatons reform. However, the specal sessons on school fnance offered legslators another opportunty to address the ssue. When Governor Perry added the topc of telecommuncatons to the legslatve call, the legslature responded by passng Senate Bll 5 by Sen. Troy Fraser and Rep. Phl Kng. It was sgned by the governor and took effect September 7, Senate Bll 5 addressed each of the regulatory ssues descrbed above subsdes, prcng, and taxes. In addton, SB 5 authorzed a state-wde franchse for vdeo and cable provders. Each of these wll be dscussed below. But n order to understand the legslaton's mpact n these areas, t s frst necessary to examne ts overall regulatory framework. Regulatory Framework Senate Bll 5 establshes three dfferent categores of ncumbent local exchange companes (ILECs): deregulated, transtonng, and regulated. The status of each company s determned by 1) the sze of the markets t serves, 2) the determnaton of the Publc Utlty Commsson (PUC) as to whether a market served by a company s suffcently compettve to allow competton, and 3) whether companes choose to be regulated or deregulated SB 5 allows an ILEC to elect to have all of ts markets reman regulated, and thus reman a regulated company regardless of the frst two factors. All markets whch cover an area wth a populaton of at least 100,000 wll be deregulated as of January The Federal Subscrber Lne Charge was nsttuted after the break-up of AT&T n 1984 to cover the costs of the local phone network. The FCC caps the maxmum prce that a company may charge for ths. Long-run ncremental cost means the change n the total costs of a company caused by producng a partcular product or servce. A market s a geographc area, whch usually embraces a cty or town and ts envrons, n whch an ncumbent local exchange company provdes resdental local exchange telephone servce. 4

5 1, For markets wth populatons between 30,000 and 100,000, the PUC must apply a market test defned n SB 5 to determne whether there s suffcent competton n a market to deregulate t by the same date. For markets under 30,000, the PUC must determne by rule a market test to be appled n makng ts determnaton n whether to deregulate a market. Smaller markets determned to be compettve wll be deregulated on January 1, As noted above, the excepton to these desgnatons s the ablty of an ILEC to elect to have all of ts markets reman regulated. A company, then, would be deregulated f t serves only deregulated markets. Deregulated companes are generally subject only to market conduct regulatons, and retan ther oblgatons of provders of last resort. Prcng regulatons also contnue n lmted fashon. Regulated companes serve only regulated markets, and are subject to all of the provsons that appled to them on September 1, Transtonng companes would be those that serve both regulated and deregulated markets. They are gven some flexblty n regulated markets that regulated companes do not have, but lack some of the flexblty n deregulated markets that deregulated companes have. The regulatory status of companes also affects ther long-dstance ntrastate access rates. The specfcs on both prcng and access rates for each of the categores of companes wll be dscussed below. There are exceptons to how a company s categorzed: as already mentoned, a company may elect to have all of ts markets reman regulated by flng an affdavt wth the PUC by December 1, 2005, and thus reman a regulated company. Companes may also petton the PUC to deregulate markets they serve after July 1, 2007 n order to change ther desgnaton. Addtonally, the PUC may re-regulate a market of less than 100,000 that t had prevously deregulated. Statewde Vdeo Franchse The statewde vdeo franchse, whch began as almost an afterthought n the telecommuncatons debate, became the centerpece of SB 5, and wll have the most mmedate benefcal mpact on consumers and the telecommuncatons ndustry. Over the last three decades, cable companes have had to go cty by cty to secure cable franchses, an expensve and tme-consumng process. Local governments used ther monopoly status to extract sgnfcant concessons from the cable companes, who had lttle choce but to pay the ctes askng prce f they wanted to do busness. Cable companes, understandably, wanted new entrants to face the same hurdle, n order to provde a level playng feld. The soluton to the problem of the local franchse, though, was not to subject new entrants to the same onerous regulatons, but to create new laws whch facltate entry and lower regulatory costs for all compettors. Senate Bll 5 accomplshed ths by makng Texas the only state that allows new entrants to receve a state franchse n order to provde vdeo or cable servce that competes wth exstng cable provders. Companes no longer wll be requred to obtan franchses from local governments. And once current franchse agreements expre, current cable provders wll be able to swtch to the statewde franchse as well. The mpact of ths change s already beng seen. SBC had prevously announced plans to nvest $4 bllon dollars to buld a fber-optc network that wll provde voce, vdeo, and hgh-speed nternet to 18 mllon households n ts 13 state terrtory. But now that the legslature has acted, SBC has made t clear that t wll be even more aggressve n buldng out ts network n Texas. 16 Verzon has spent $1 bllon to reach a mllon homes wth fber n ts mult-state servce regon, whch ncludes Texas. But the rollout of new servces had been slowed because t was takng Verzon sx to 18 months to obtan a sngle local franchse. The market test requres that there be at least three compettors n a market n addton to the ILEC. 5

6 The statewde franchse wll accelerate Verzon s efforts to offer broadband and vdeo to consumers. The company estmates t wll now reach three mllon homes by the end of ths year, and that the deployment effort wll create 3,000 to 5,000 new jobs wth the company. 17 And whle the cable ndustry opposed the statewde franchse, t responded to t very quckly. Tme Warner Cable recently rolled out new servces allowng people to track ther ebay bds va ther cable TV 18 and dsplay Caller ID on the televson screen. 19 New technology n the works wll allow cable companes to ncrease ther bandwdth and offer more channels to subscrbers. Perhaps the most clear sgnal of the benefts of the statewde franchse s that Charter Communcaton, the frst cable-televson company to face competton from Verzon s FOs TV servce, has already lowered ts cable prces n Keller, Texas n response. Subsdes Approxmately 95 percent of all basc resdental servce n Texas s subsdzed. 20 Ths does not mean, though, that 95 percent of all resdental consumers are subsdzed. Many consumers buy addtonal servces, such as Caller ID and voce mal, that make up for the low prce of ther basc servce so the telephone company makes a proft. But the fact remans that whle charges for basc servce run from $13.82 per month n rural areas to $16.72 n urban areas, long-run ncremental costs for servce range from $11.84 per month n the most densely-populated areas to more than $250 per month n rural areas. Telephone subsdes are a way of lfe n Texas. Three subsdes wll be dscussed n ths secton: Intrastate access charges, Texas Unversal Servce, and prvate network servce. Intrastate Access Charges The average ntrastate access rate n Texas s approxmately 6 cents per mnute, compared to about 1 cent per mnute for nterstate access. Whle nformaton s not avalable for the entre state, ths means that large ncumbent carrers (SBC, Verzon, Central, and Unted) revenue from ntrastate access charges may exceed the cost of provdng the servce by $172 mllon. Though all provders rely heavly on these subsdes (along wth unversal servce) for revenue, ths excess provded sgnfcant poltcal pressure for reducng the ntrastate rate, at least n the case of SBC. Under SB 5, deregulated companes must reduce ther ntrastate access rates to party wth ther nterstate rates. Transtonng companes must reduce ther ntrastate rates to party wth four equal annual reductons, begnnng July 1, 2006 for companes already havng that desgnaton. The rates, however, are adjusted to reflect the mx of regulated and deregulated markets the companes serve n effect allowng companes to contnue to receve revenue as f ther rates n regulated markets had not decreased. SBC s sngled out n ths bll; t must decrease ntrastate access rates n three equal annual reductons begnnng on July 1, The ntrastate access rates of regulated companes are not affected by SB 5, so companes can avod reducng ther access rates by pettonng the PUC to reman regulated. Texas Unversal Servce Fund Texas establshed the Unversal Servce Fund n 1987 to pay for a number of programs ntended to enable all state resdents to obtan basc telephone servce at low prces. The state unversal servce program subsdzes phone companes that provde servce n hgh cost or small rural areas, subsdzes Lfelne, and Lnkup servce for lowncome customers, ads phone companes that do not opt for alternatve regulaton wth certan costs assocated wth long-dstance servce, and pays for telecommuncatons relay servce so that ndvduals who are speech- or hearng-mpared can use the phone network. The vast majorty of the fundng s for the hgh-cost and rural subs- Access charges are the per mnute fees charged by local telephone companes for provdng connectons for the orgnaton or termnaton of ntrastate and nterstate long dstance phone calls. 6

7 des. 21 USF payments for FY 2004 were estmated to be $586 mllon. 22 In addton to shftng costs from one set of consumers to another, the USF causes prce dstortons and assocated reductons n consumer welfare that occur because the current percentage assessment ncreases the cost of every addtonal wreless and long dstance mnute. Crandall and Ellg estmate that the USF reduces the welfare of Texas consumers and provders by as much as $177 mllon annually. 23 The sze of the USF was not the only ssue the legslature sought to address n SB 5. Snce the market nformaton used to determne USF payments s dated, there was concern among many legslators that the fund s not achevng ts ntended purpose. Specfcally, there s a hgh lkelhood that payments are beng made to companes servng areas that were once hgh cost rural areas but are now lower cost suburban areas, and as such do not need the same amount of support (f any) from the USF. Lkewse, ther may be rural markets whch have decreased n sze whch mght justfy hgher payments under the current scheme. Other legslators also questoned USF payments because n many cases they transferred wealth from poorer urban consumers to wealther rural consumers. Senate Bll 5 requres the PUC to study the USF and report ts fndngs on questons such as: Is the USF accomplshng the purposes for whch t s desgned? Are USF funds beng spent for ntended purposes? Has the USF acheved ts purposes? Should the USF be abolshed or phased out? Should the USF be brought wthn the state treasury? Is the current USF fundng mechansm adequate n the future? Should the current system prove nadequate for future needs, what are alternatve USF fundng mechansms? Senate Bll 5 also adds a new Audo Newspaper program to be supported by USF, requres steps to expand enrollment n the Lfelne Servce and allows the PUC to modfy USF per-lne support after September 1, Prvate Network Servce Texas ILECs are requred by the Publc Utlty Code to offer hgh speed access, or prvate network servce, to a varety of users at reduced rates. Whle some ILECs are rembursed for ths from the USF, others are not. Thus the full cost of ths subsdy s not reflected n USF reports. The enttes elgble to receve ths subsdy nclude publc schools, nsttutons of hgher educaton, publc lbrares, non-proft hosptals, and the Texas Educaton Agency. Under the Publc Utltes Code, companes that had elected to be regulated under Chapters 58 and 59 had to provde prvate network servce for sx years at fxed rates from the date of ther electon. However, SB 5 extended ths tme perod, and requres these companes to contnue provdng ths servce wth no prce ncreases untl January 1, 2012, regardless of ther electon date. SB 5 also requres the PUC to evaluate a new fundng mechansm to provde fnancal support to all telecommuncatons utltes that provde dscounts or prvate network servces at prescrbed rates. So not only does SB 5 extend,.e., ncrease, subsdes for the elgble nsttutons, t also contemplates the possblty of ncreasng taxes or fees to pay for them. Prcng Regulaton As prevously noted, Texas generally employs prce caps, prce floors, and tarffed rates to regulate telecommuncatons prces. Under pror law, many companes would have been allowed to rase rates for basc servce after September 1, 2005, subject to revew by the PUC. However, ths was put on hold by SB 5. 7

8 Now, deregulated companes cannot rase rates for basc servce untl September 1, In addton, they must apply rates evenly across a market, consstent wth prcng flexblty that was avalable on August 31, They are also subject to applcable PUC rules relatng to dscrmnatory and predatory prcng under Chapter 60 of the Publc Utltes Code. However, for the most part, prcng regulatons on these companes are lmted, especally after August of As wth deregulated companes, transtonng companes are also prohbted from rasng rates for basc servce n deregulated markets untl September 1, Also n deregulated markets, they are subject to prce floors for all servces set at the servce s long run ncremental cost. In regulated markets, they are generally governed by the law as t appled to them before the effectve date of SB 5. However, they are gven more flexblty n package prcng and n ntroducng new servces. Varous other prcng provsons are contaned n SB 5. The bll: deregulates resdental call watng and drectory assstance; regulates (n regulated markets) Caller ID prcng for customers 65 and older; establshes a general prohbton on antcompettve, unreasonably preferental, and predatory prcng; prohbts rates for pay phones whch exceed the rates for regular busness lnes; and keeps current law whch deregulated busness access lnes on September 1, Taxes The already hgh tax burden on telecom taxes n Texas could qute possbly ncrease under SB 5 exactly how much can t be determned wth exstng data. The followng examnes all potental changes to telecommuncatons and vdeo taxes over the next two years, even though some of these were not ncluded n SB 5. Voce Over Internet Protocol SB 5 for the frst tme mposes muncpal access lne fees on many provders of phone servce usng VOIP technology. At the tme of the passage of the bll, the Legslatve Budget Board dd not determne the overall mpact of ths tax ncrease. Telecommuncatons Infrastructure Fund The TIF tax was orgnally passed to fund Internet and other communcatons nfrastructure n publc nsttutons such as publc schools. However, snce the nfrastructure has been completed, the fund s no longer needed, and the tax would not have been collected any more under exstng law. But the legslature kept the TIF tax alve last sesson at a cost to consumers of as much as $125 mllon per year, and dverted the funds to general revenue. Statewde Vdeo Franchse Fee The statewde vdeo franchse allows vdeo and cable provders to get permsson to offer servces n Texas from the state nstead of local governments. SB 5 mposes a fve percent tax on gross revenues for any company that establshes a statewde vdeo franchse. Eventually, there wll also be an addtonal one percent tax n leu of n-knd servces. The sx percent tax wll be pad to ctes where the franchsees do busness. The LBB dd not determne the consumer cost of ths fee. Texas Unversal Servce Fund The drect tax consequences of SB 5 regardng the USF are small. SB 5 establshed a new Audo Newspaper Program to be pad out of the USF. Ths wll ncrease the revenue needed from the USF only slghtly. The most sgnfcant tax mpacts, postve or negatve, wll not begn untl 2007 as the legslature and the PUC mplement changes to the USF as a result of the studes mandated n SB 5. Ctes have tradtonally charged telephone companes for usng the ctes rghts-of-way to lay telephone lne. VOIP telephone servce uses the Internet to reach consumers, usng lnes for whch ROW or franchse access fees have already been pad. Provders of ths servce had not prevously been subject to muncpal access fees. The TIF provson was n SB

9 Prvate Network Servce As wth the USF, the most sgnfcant mplcatons regardng the Prvate Network Servces (PNS) wll be n the comng years. Snce SB 5 mandated an extenson of the PNS wth no ncrease n rates for at least seven years, consumers wll have to bear the burden for ths program, ether through servce charges for servces or taxes. Rght-of-Way Management Local government revenue from ROW management was not addressed durng the legslatve sesson. However, t s hghly lkely that the legslature wll address ths topc wth an nterm study. The study could nclude lookng at the mechansms to pay muncpaltes for 1) utlty relocatons n the publc rghts of way and 2) use of the publc rghts of way. One possble outcome of ths study s that the legslature could extend the ROW use fee from tradtonal landlne phone companes to wreless companes, whch currently do not pay ths fee because they do not use the publc ROW. Other Provsons Two other provsons of SB 5 have the potental for havng sgnfcant mpacts on the telecommuncatons market n Texas. The frst s allowng electrc utltes to offer Internet servce also known as broadband over power lnes, or BPL. Ths offers the possblty of an addtonal Internet Servce Provder n every market. The second s allowng provders of last resort to use any technology to meet ther oblgaton. Ths could sgnfcantly lower future costs n provdng telephone servce n rural areas of the state. The Road Ahead The Texas system of state-managed competton n telecommuncatons must contnue ts transton toward market-managed competton n order to speed the ntroducton of new technologes that would provde Texas consumers wth better products and servces at lower cost. SB 5 s an excellent start n ths drecton. As t was 10 years ago, Texas s once agan a natonal leader n telecommuncatons regulaton. The statewde vdeo franchse, BPL, and provder of last resort provsons all ntroduce compettve forces that wll foster nvestment and nnovaton. The reducton of ntrastate access charges n many markets wll begn to reduce these subsdes, wth the potental of even greater reductons n subsdes comng from the mandated USF study. The deregulaton of basc servce n larger markets n two years, along wth the provsons n current law deregulatng busness servce and allowng compettve prcng to wn back old customers, wll provde companes much of the flexblty they need to respond to consumer demands. All ths means that prces for vdeo, voce, and broadband are lkely to drop, just as they have n the past as competton ncreased. And the hgh tech economy n Texas and elsewhere wll expand as the competton attracts new captal, spurs product nnovaton, and creates new jobs. However, even wth ths promsng future ahead, there are mportant ssues that stll need to be addressed. SB 5 leaves the resoluton of sgnfcant aspects of the telecommuncatons market to future legslatures, and sets poor precedent n others. How these ssues regulaton, subsdes, and taxes are resolved over the next two years wll lkely determne the robustness of competton n Texas n the years to come. The followng dscusson of these ssues contans recommendatons desgned to assst polcymakers as they mplement SB 5, undertake nterm studes, and prepare for the contnued debate on ths ssue n the 80 th Texas Legslature. Regulaton As much as t s mproved n SB 5, the regulaton of Texas telecom markets stll contans too many relcs of the monopoly era. One flaw s that the tmelne for future deregulaton n many markets s determned by market tests (by law or by rule). Whle market tests can provde nformaton to regulators about competton n a market, they are too often used by ncumbents to slow down the transton to competton. Market tests are tools used by regulators to measure the amount of competton, or the potental for competton, n a partcular market. 9

10 It s true that major markets wth mllons of consumers wll lkely be deregulated at the begnnng of 2006 but not wthout lmtatons. Basc servce n these markets s not deregulated untl at least September 1, 2007, prces and servces are mandated to be smlarly avalable across a market, and prces cannot be dscrmnatory or predatory. The prce floors that apply to transtonng companes n deregulated markets also hnder competton. Prce floors, lke many anttrust provsons, are actually desgned to lmt competton n order to protect less effcent companes from competton, on the theory that they are needed n order to keep the market compettve. Convoluted reasonng lke that can only harm consumers by keepng prces artfcally hgh. A sgnfcant desgn flaw n the bll s that t provdes a dsncentve for companes to choose deregulaton. Companes operatng n deregulated markets must reduce, or begn to reduce, ther ntrastate access rates more than a year before they would receve prcng flexblty on basc servce. So whle they face a revenue loss from access charges, they would be lmted n how they could recoup the loss. Recommendaton: The relcs of monopoly regulaton such as prce caps and floors should be removed from the current system. Texas telecommuncatons polcy should reflect the vbrant competton n many markets by mmedately removng all prce controls n deregulated markets, provdng a postve ncentve for companes to choose deregulaton. Recommendaton: Frm tmelnes should be set for the deregulaton of all telecommuncatons markets. Whatever the sze or geographc locaton of the market, t s clear that technology wll soon brng real competton n telecommuncatons to every part of the state. A phased-n approach to deregulaton n md- and small-szed markets would encourage competton by ensurng market partcpants (current and potental) understand that competton s nevtable. Subsdes Senate Bll 5 defntely sent mxed sgnals when t comes to subsdes. On the one hand, t set frm dates for the state s largest telephone company to reduce ts ntrastate rates to party wth ts nterstate rates and ordered the PUC to determne whether the USF should be abolshed or phased out. On the other hand, t added a new program to be pad for by USF, extended the subsdes for Prvate Network Servce, asked the PUC to consder new fundng sources to pay for these subsdes and allowed many companes to opt out of reducng ntrastate rates to party. Taxes Recommendaton: Sgnfcant reductons n telecommuncatons subsdes should be the focus of relevant nterm and legslatvely-mandated studes. Subsdes not only transfer hundreds of mllons of dollars from one set of consumers to another, they also cause market neffcences that harm all consumers. The fndngs and recommendatons of the nterm and legslatvely-mandated studes should not be value neutral. Instead, they should make t clear that sgnfcant reductons n subsdes are a prorty makng subsdes more effcent by ensurng they are used for ther ntended purposes s not suffcent. Recommendaton: Reductons n subsdes should be pared wth prcng flexblty. Texas has used subsdes to meet certan polcy goals, and companes have come to rely on subsdes. If Texas s gong to reduce subsdes and rely more on competton and other means to acheve ts goals, t should make competton more attractve to ncumbent frms by gvng them the prcng flexblty needed to recover lost ncome from subsdes. Tax polcy s perhaps the weakest aspect of SB 5. Whle t was clear that Texas telecommuncaton regulatons were n need of an update, qute often one of the benefts of outdated regulatons s that the markets have developed n a way so that the tax burden on an ndustry has actually reduced. Ths seems to have been the case n Texas. Muncpaltes have clamed recent declnes n revenues from ther rght-of-way fees on phone lnes as consumers swtched to wreless and VOIP servces that were not subject to the fees. Vdeo satellte servce and the mpendng Internet Protocol Televson (IPTV) threatened to bypass ctes cable franchse fees. And collecton of the TIF tax had been scheduled to end. 10

11 Unfortunately, the update of the Texas telecommuncatons tax structure n SB 5 (and SB 1863) was largely desgned to enhance dmnshng revenue streams, partcularly at the muncpal level. VOIP provders are now subject to the telecommuncatons franchse tax, and telephone companes that provde IPTV va phone lnes wll have to pay two taxes on the same lne. Whle the data are not yet suffcent to quantfy the mpact, t s clear that the telecommuncatons tax burden on Texans, already thrd hghest n the naton, wll not be mproved and could qute possbly ncrease. Recommendaton: The hgh telecommuncatons tax burden on Texas busnesses and consumers should be reduced. Ths tme of transton n telecommuncatons markets and regulaton should be used to beneft consumers by reducng the hgh telecommuncatons tax burden of Texans, nstead of seekng to ways to replensh dmnshng revenue streams of the state and local governments. References 1 Robert W. Crandall, Jerry Ellg, Texas Telecommuncatons: Everythng s Dynamc Except the Prcng (Texas Publc Polcy Foundaton, Jan. 2005) 5. 2 Robert W. Crandall, After the Breakup (Washngton, DC: Brookngs Insttuton Press, 2000) Crandall and Ellg, Texas Telecommuncatons, 8. 4 Crandall and Ellg, SBC, A Hstory of Lower Prces, Better Products (2005). 6 Crandall and Ellg, Texas Telecommuncatons, Federal Communcatons Commsson, Hgh-Speed Servces for Internet Access: Status as of December 31, Ibd. 9 Crandall and Ellg, Texas Telecommuncatons, SBC, A Hstory of Lower Prces, Better Products (2005). 11 Crandall and Ellg, Texas Telecommuncatons, 22, Crandall and Ellg, Domnck T. Armentano, Anttrust Reform: Predatory Practces and the Compettve Process, The Revew of Austran Economcs, 3:1 (1993) Telecommuncatons Tax Task Force of the Councl On State Taxaton, State Study and Report on Telecommuncatons Taxaton (May 2005). 15 Sean Parnell, Budget & Tax News, Heartland Insttute (August 1, 2005). 16 Jm Epperson, SBC s senor vce presdent of external affars, Intervew by author, Aug. 12, Bll Kula, drector of meda relatons for Verzon s Western Bureau, Intervew by author, Aug. 12, New on TV: multple-channel screen, Wall Street Journal, Sept. 5, Caller ID on the televson screen, Rochester Democrat and Chroncle, Aug. 20, Crandall and Ellg, Texas Telecommuncatons, Publc Utlty Commsson of the State of Texas, Report to the 79th Texas Legslature, Scope of Competton n Telecommuncatons Markets of Texas (2005) PUC, Competton n Telecommuncatons Markets of Texas, Crandall and Ellg, Texas Telecommuncatons, 34. Bll Peacock s the economc freedom polcy analyst at the Texas Publc Polcy Foundaton. The Center for Economc Freedom was establshed by the Texas Publc Polcy Foundaton to champon economc freedom n Texas by provdng polcymakers wth relable nformaton and practcal market-based alternatves to state regulaton of transactons between busnesses, employees, and consumers. Contact Bll Peacock at: bpeacock@texaspolcy.com 11

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